Where will grocery shoppers turn?

The demise of Dominick's could lure another supermarket chain to the region

The demise of Dominick's after nearly 90 years is a blow to many Chicagoans, especially its loyal customers, whose weekly routine is soon to change.

While some displaced shoppers may end up wheeling their carts through new upscale specialty markets as others will frequent discount chains, the traditional grocery store is not going the way of the video store or drive-in movie anytime soon.

Rival Jewel Foods already has agreed to acquire four of Dominick's 72 locations, and the gaping hole in the middle of the Chicago grocery market could lure another traditional supermarket chain to the region, with some analysts pointing to Cincinnati-based Kroger as a potential buyer.

"That's the most probable case from our view, if somebody were to come in and make a big, sweeping move," said Ken Perkins, a grocery analyst for Morningstar. "Kroger has been firing on all cylinders."

Discussions are underway with a number of potential buyers for the closing Dominick's stores, according to sources, as Safeway prepares to exit the market by early 2014. Safeway President and CEO Robert Edwards announced plans Thursday to give up on its Dominick's chain. He said the disposition of its properties "probably will play out in pieces," giving rise to speculation that everyone from upmarket players such as Mariano's to warehouse discounter Meijer may be moving in.

"We anticipate solid demand for most of the remaining 68 stores," Andrew Wolf, an analyst for BB&T Capital Markets, said in a report.

Dominick's, which was started in 1925 as a small corner market on the West Side by Italian immigrant Dominick DiMatteo, grew into Chicago's second largest grocery chain behind Jewel, together chasing away national retailers — including Kroger — during the 1970s and '80s. After a succession of owners, California-based Safeway bought Dominick's for $1.2 billion in 1998, incorporating the legacy Chicago grocer into the nation's second-largest chain.

In the first nine months of the year, the Dominick's unit lost $13.7 million before taxes. It has been losing market share for years to Wal-Mart, Costco and specialty markets, dwindling to less than 9 percent of local grocery dollars. As recently as the late 1990s, Jewel and Dominick's controlled two-thirds of the market.

"After a sustained effort, after a long time attempting to strengthen Dominick's and its position in Chicago, some progress has been made, but it was not enough to justify further investment," said Safeway spokeswoman Teena Massingill.

According to a study by the U.S. Department of Agriculture, warehouse and supercenter stores grew from 7 percent to 16 percent of grocery store sales between 2000 and 2011. Traditional grocery stores dropped from 77 percent to 70 percent during the same time.

Despite being squeezed on the low and high end, traditional supermarkets are still the predominant way most people buy groceries. And some, like Kroger, the largest traditional grocery chain in the U.S., are thriving.

At the end of 2012, Kroger had 2,424 supermarkets in 31 states, generating nearly $97 billion in sales. While grocery stores have very low margins, Kroger is able to keep prices down through aggressive use of its private brands, 40 percent of which are produced in its own manufacturing plants. While it fills the same niche as a Jewel or Dominick's, shoppers will typically fill their carts for less at Kroger, according to Perkins. According to Bloomberg, Kroger's profit margin is 2.9 percent, compared with Safeway's 2.1 percent.

"Kroger has done a good job of driving private label penetration," Perkins said. "To that extent, private label is cheaper for the customer so you can remain price competitive."

Kroger, which was founded in 1883, exited the Chicago market in 1970, selling its stores to Dominick's. But it found its way back with its 1998 acquisition of California-based Food 4 Less, a midsize discount chain. There are 16 Food 4 Less stores in the area, according to the Kroger website. There are also dozens of Kroger stores in Illinois, with the nearest locations in Bourbonnais, Ottawa and northwest Indiana.

A Kroger spokesman declined to comment on interest in acquiring any of the Dominick's locations.

Jewel, the area's leading local grocery chain, with 176 stores and close to 30 percent of the market, is acquiring four Dominick's stores: 1340 S. Canal St. and 2550 N. Clybourn Ave. in Chicago; 14200 S. Bell Road, Homer Glen; and 1340 Patriot Blvd., Glenview. In March, Jewel was sold to Cerberus Capital Management as part of a $3.3 billion deal that also included the Acme and Shaw chains and the rest of the Albertsons grocery chain. Sources say that Jewel is likely to acquire several more locations, but calls to a corporate spokeswoman were not returned.

David Livingston, a supermarket analyst with DJL Research, said he believes that everyone — from consumers to competing retailers — may benefit from Dominick's leaving the market.